A firm currently has no debt. Its' required return on stock is based on an unlevered...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A firm currently has no debt. Its' required return on stock is based on an unlevered beta of 0.8, a risk free rate of 4% and a market risk premium of 5%. EBIT (taxable income if an all equity firm) = $1600 Capital expenditures = depreciation, so no net investment. Assume the firm faces a 25% tax There are 100 shares All the cash flows are level perpetuities a) What is the firm's stock worth per share with no debt assuming the required return on unlevered firm is 8% = 4% + .8 x 5%? b) What would the firm be worth if the firm could borrow $1,000 risk free at 4%, there was no chance of default, but the loan would be paid off with a $1,000 payment in 5 years and the firm figured it would never borrow again! The firm will borrow $1000 (and just pay a dividend right away to investors with the borrowed money. What is the total firm value (debt + equity) and what is the equity value per share after the money is borrowed and the dividend paid? A firm currently has no debt. Its' required return on stock is based on an unlevered beta of 0.8, a risk free rate of 4% and a market risk premium of 5%. EBIT (taxable income if an all equity firm) = $1600 Capital expenditures = depreciation, so no net investment. Assume the firm faces a 25% tax There are 100 shares All the cash flows are level perpetuities a) What is the firm's stock worth per share with no debt assuming the required return on unlevered firm is 8% = 4% + .8 x 5%? b) What would the firm be worth if the firm could borrow $1,000 risk free at 4%, there was no chance of default, but the loan would be paid off with a $1,000 payment in 5 years and the firm figured it would never borrow again! The firm will borrow $1000 (and just pay a dividend right away to investors with the borrowed money. What is the total firm value (debt + equity) and what is the equity value per share after the money is borrowed and the dividend paid?
Expert Answer:
Answer rating: 100% (QA)
a Firms Stock Worth per Share with No Debt Required Return on Stock RiskFree Rate Unlevered Beta Mar... View the full answer
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-0133400694
1st canadian edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford, David A. Stangeland, Andras Marosi
Posted Date:
Students also viewed these accounting questions
-
This case study on project evaluation is applicable for beginning courses in corporate finance or finance strategy. Two alternative investment options are available to evaluate. Challenges are...
-
This case study on project evaluation is applicable for beginning courses in corporate finance or finance strategy. Two alternative investment options are available to evaluate. Challenges are...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
McIntyre Industries Work in Process Inventory account had a $68,000 beginning balance on May 1 ($40,000 of this related to direct materials used during April, while $28,000 related to conversion...
-
A block of mass m1 is pulled along a smooth horizontal surface by a force exerted at the end of a rope that has a much smaller mass m2, as shown in Figure. (a) Find the acceleration of the rope and...
-
You live in the building on the left in the drawing, and a friend lives in the other building. The two of you are having a discussion about the heights of the buildings, and your friend claims that...
-
A double acting reciprocating pump has a piston of \(400 \mathrm{~mm}\) diameter and piston rod of \(40 \mathrm{~mm}\) diameter. Stroke length is \(300 \mathrm{~mm}\) and speed is \(60...
-
Implement the event-driven simulation of a bank that this chapter described. A queue of arrival events will represent the line of customers in the bank. Maintain the arrival events and departure...
-
Use the information below to calculate the machine's depreciation expense Machines initial cost $820 Residual value. $120 The Company started to use the machine on May 1, 2020 The useful fe of the...
-
The Batley Print Shop, which is not registered for VAT, rents a photocopying machine. It makes a quarterly payment as follows: (a) Three months rental in advance (b) A charge of 2 pence per copy made...
-
Three possible product cost definitions were introduces: (1) value-chain, (2) operating, and (3) product or manufactoring. Identify which of the three products cost definitions best fits the...
-
Discuss the meaning of sound banking industry.From the risk perspective ,what are the most important factors to consider when running a banking institution?
-
What causes surface winds to be weaker than geostrophic winds? Explain.
-
Licking the backs of certain frogs produces visual and hallucinations, memory loss and cognitive dysfunction. What parts of the brain do you think that it affects? What receptors may be involved?
-
Elaborate extensively on the evolutionary trajectories of snakes, crocodiles, lizards, and turtles, elucidating the complex biological adaptations, genetic diversifications, and ecological contexts...
-
Coronado Industries had January 1 inventory of $300000 when it adopted dollar-value LIFO. During the year, purchases were $1830000 and sales were $3070000. December 31 inventory at year-end prices...
-
what happens to the real and reactive power in a transmission line when the voltages are equal but out of phase.
-
What are the four types of poultry production systems? Explain each type.
-
Describe common loan stipulations and fees?
-
Explain two methods we use to calculate the NPV of a foreign project.
-
What does the dividend discount model say about valuing shares of stock?
-
Show that in the case of a binary system in which the orbit is circular of radius \(r\), the kinetic energy corresponds to half the absolute value of the potential energy. In other words, the total...
-
Calculate the radius \(R_{S}\) of the orbit of a geostationary satellite using the lunar period, \(T=27.3\) d, and the Earth-Moon distance, \(D_{T L}=3.810^{5} \mathrm{~km}\), as data.
-
In the case of a gravitationally bound two-body system on an elliptical orbit in which there is energy dissipation as in the case of the question 4, explain why the system first tends to have a...
Study smarter with the SolutionInn App